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CSEET · Fundamentals of Accounting

Introduction to Company Accounts for CSEET Paper 2

Company accounts is the branch of accounting that records how a company raises capital through shares and debentures and reports its results. To solve questions, learn the journal entries for each event, pass them step by step through the bank, share capital and premium accounts, and present final accounts in Schedule III format.

What this chapter covers

This chapter moves you from the accounts of a sole trader or partnership to the accounts of a company. A company is a separate legal person. Its owners are shareholders, and its capital is split into shares. So the chapter starts with what makes company accounts different, then covers how a company raises money: shares first, then debentures.

The core skill is journal entries. You will record application money, allotment money, calls, premium, forfeiture, re-issue and redemption. Each event has a fixed entry pattern. Once you know the pattern, numerical questions become mechanical.

The chapter ends with the final accounts of companies in the format of Schedule III. This links to the rest of Paper 2, where you already study the trial balance, the statement of profit and loss and the balance sheet. Here the same ideas appear in the company format, with share capital, reserves and borrowings added.

Paper 2 is a written paper in which Question 1 is compulsory and you choose five more questions from Questions 2 to 8. Company accounts gives you numerical questions with clear step marks, so a student who knows the entry patterns can score reliably even when the figures are long. The chapter also feeds your understanding of Business Laws in Paper 4, because the share issue rules come from the Companies Act, 2013. Clear, neat journal entries and a correct Schedule III layout are easy marks that many students lose through carelessness.

Introduction to Company Accounts: topics in the order to study them

  1. 1Meaning and Features of Company AccountsStart here to understand the company as a separate legal person and why its accounts follow a prescribed format.
  2. 2Share Capital and Types of SharesYou need the terms authorised, issued, subscribed, called-up and paid-up capital, and equity versus preference shares, before any entry.
  3. 3Issue of Shares at Par, Premium and DiscountThis is the core entry-writing topic, and the later topics depend on it.
  4. 4Forfeiture and Re-issue of SharesIt builds directly on issue entries, because you must know what was received and what was due.
  5. 5Issue and Redemption of DebenturesDebentures are borrowed money, so study them after share capital to see how the entries differ.
  6. 6Final Accounts of Companies and Schedule IIIStudy this last, because the balance sheet brings together share capital, reserves and borrowings from all earlier topics.

How to prepare Introduction to Company Accounts

Treat this chapter as a set of entry patterns plus one format. Practise on paper, not just by reading, because the marks come from writing entries correctly.

  1. Read the basic terms first: authorised, issued, subscribed, called-up and paid-up capital. Write one line for each in your own words.
  2. Learn the share issue sequence: application, allotment, first call, final call. For each stage, write the entry for money due and the entry for money received.
  3. Add premium and discount. Remember that a premium goes to the securities premium account, and that a company cannot normally issue shares at a discount.
  4. Solve forfeiture and re-issue problems in a fixed order: cancel the share capital called up, credit the amount received, then deal with the forfeiture account on re-issue. Transfer any gain to capital reserve.
  5. Practise debenture issue and redemption separately. Note the difference between issue at par, at a premium and at a discount, and between redemption at par and at a premium.
  6. Redraw the Schedule III balance sheet from memory three times. Then fill it from a short trial balance.
  7. Do timed practice. Give yourself one question's time, write full entries with narrations, and check each total.

Common mistakes in Introduction to Company Accounts

  • Crediting the securities premium to the profit and loss account or to share capital.

    Fix: Always credit premium to the securities premium account. It is a capital item and has restricted uses.

  • Forfeiting shares at the wrong amount.

    Fix: Debit share capital with the amount called up, and credit the amounts unpaid and the forfeiture account with what was actually received.

  • Mixing up the capital redemption reserve with the securities premium account.

    Fix: Remember the sources: premium comes from issue above face value, while the capital redemption reserve is created from profits when preference shares are redeemed or own shares are bought back.

  • Skipping narrations and workings.

    Fix: Write a one-line narration for each entry and keep neat workings, since a written paper gives marks for steps.

  • Placing items under the wrong head in the balance sheet.

    Fix: Learn the main heads: equity and liabilities, assets, and under them shareholders' funds, non-current and current items. Practise placing each item before totalling.

Last-day revision: Introduction to Company Accounts

  • A company is a separate legal person with perpetual succession; shareholders own it, directors run it.
  • Authorised capital ≥ issued capital ≥ subscribed capital; paid-up capital = called-up capital − calls in arrears.
  • Under section 55 of the Companies Act, 2013, a company limited by shares cannot issue irredeemable preference shares.
  • Preference shares must be redeemed within twenty years of issue, except certain infrastructure projects.
  • Preference shares can be redeemed only if fully paid, out of divisible profits or a fresh issue of shares.
  • When redeeming out of profits, transfer the nominal amount of shares redeemed to the Capital Redemption Reserve.
  • Under section 52, premium on shares goes to the securities premium account, which is not a free profit.
  • Securities premium can be used for bonus shares, preliminary expenses, issue expenses, premium on redemption and buy-back.
  • Under section 53, shares issued at a discount are void, with a limited exception for creditors under a debt restructuring.
  • Bonus shares can be issued out of free reserves, securities premium or capital redemption reserve, but not out of revaluation reserve.
  • Bonus shares cannot be issued in lieu of dividend (section 63), and partly paid shares must first be made fully paid.
  • Under section 62, further shares are first offered to existing equity holders, with a notice period of at least fifteen days unless a lesser period is prescribed, and not more than thirty days.

Introduction to Company Accounts practice questions

Introduction to Company Accounts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Introduction to Company Accounts: frequently asked questions

Is Introduction to Company Accounts important for CSEET?

Yes. It is a core chapter of Paper 2, Fundamentals of Accounting, which is a written paper. It gives numerical questions with step marks, and it supports your later study of company law.

Can a company issue shares at a discount?

As a general rule, no. Section 53 of the Companies Act, 2013 says a company shall not issue shares at a discount, and shares so issued are void. A limited exception exists for conversion of debt into shares under a statutory resolution plan or debt restructuring scheme specified by the Reserve Bank of India.

What is the difference between securities premium and capital redemption reserve?

Securities premium is the amount received above the face value of shares. The capital redemption reserve is created out of profits when preference shares are redeemed out of profits, or when own shares are bought back out of free reserves or securities premium. Both can be used to issue fully paid bonus shares.

How should I practise this chapter for the written paper?

Write full journal entries with narrations and workings, and time yourself. Redraw the Schedule III balance sheet from memory until you can do it without help.